The GBP/USD pair rose during the session on Friday, but as you can see gave back quite a bit of the gains in order to form a shooting star. This shooting star signals that we may be going lower, and as a result it looks like the bullishness that we saw on Thursday could be reversed in short order. This is often the case when a currency acts in a knee-jerk manner, as it was simply a reaction to the Mervyn King statement that the “Bank of England wasn’t trying to devalue the Pound.”
If you believe this, then you probably believe that the Bank of Japan isn’t trying to devalue the Yen either.
Looking at this chart, we think the trend is without a doubt to the downside, as most of the world does too. You can see that there is a gap from a couple of weeks ago that should offer resistance, and so far it worked. We think this pair will continue to grind around the 1.50 level, as there is absolutely no reason to buy the Pound at this point. Whether or not we can break down this market might be another story, but we think the 1.48 level is crucial. If we can get below that, we think this market can go as low as 1.45 over the medium-term, as the British economy continues to weaken.
Going forward, we think that if we managed to break the bottom of the candle on Friday, this is enough to start selling the Pound. We would expect a little bit of noise at the 1.50 handle, but since we have sliced through a couple of times out, we think the reaction will be relatively minor. The real question will come at the 1.48 handle which should start to show significant support. If we can get below that, we would probably add to the position as well. As far as buying is concerned, we need to break above the 1.53 level to consider it. At this point in time, that doesn’t look likely, but if we did it would be significant simply because of the gap and the shooting star preceding that.
Written by FX Empire